Flood Insurance

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Issue

The National Flood Insurance Program (NFIP) continues to be in need of further reforms and a new structure for regulatory implementation. Recent affordability concerns have forced re-examination of earlier reforms.

ABA's Position

ABA supports efforts by the Federal Emergency Management Agency (FEMA), the Administration, and the Congress to reform the NFIP. Concerns about the actuarial soundness of the NFIP, the ever-increasing cost to the U.S. Treasury of providing federal disaster relief to the uninsured, and a host of complex mapping, environmental, and floodplain management issues necessitate a wholesale reform of the NFIP. ABA believes that a necessary predicate to this reform must be the recognition that tying the mandatory purchase of flood insurance to a mortgage—and charging financial institutions with its enforcement—has failed to ensure adequate NFIP participation to the detriment of the viability of the NFIP. Thus, we urge that any reform effort end the system's dependence on bank enforcement of NFIP coverage in favor of the establishment of a new framework that promotes market options, increases the availability and affordability of coverage for all at-risk properties, and eliminates compliance burden in favor of safe and sound risk management controls. With respect to the latter, and in response to the January 18, 2011 Executive Order on Improving Regulation and Regulatory Review, ABA has urged the federal banking agencies to review the complexity and burden of compliance with flood insurance regulations as banks are increasingly required to become involved with complex insurance and flood mapping determinations.

Explanation

In July 2012, Congress reauthorized the NFIP for five years under the "Biggert-Waters" Act. The program had been operating on a month-to-month basis, with short term renewals and had been shut-down repeatedly. Reauthorization brought certainty to real estate transactions in more than 20,000 communities nationwide where flood insurance is required for a mortgage. It was a significant development for the 5.6 million business- and homeowners who rely on the NFIP, as well as U.S. taxpayers as the reforms in Bigger-Waters are intended to put the NFIP on a more actuarially solid financial footing.

In addition to reauthorization, Biggert-Waters phases-out subsidized flood insurance rates for non-primary residences, commercial properties and severe repetitive loss properties. The law also immediately eliminates subsidies upon the sale of a property or if a flood insurance policy is permitted to lapse. Finally, Biggert-Waters phases out “grandfathered” status. Formerly, properties built before flood maps existed or those built in conformity with older flood maps continued to pay premiums based on the old maps, even when new maps are issued. Biggert-Waters phases out grandfathered status; when new maps are issued, all premiums will reflect the risk of flooding under the new maps. The law also directed FEMA to report on the affordability of these reforms so Congress could consider the impact as they took effect. That Congressionally mandated report is now overdue.

To address affordability issues triggered by the 2012 Biggert/Waters reforms and FEMA remapping, on March 4, 2014, the House of Representatives passed a bill supported by ABA, HR 3370, the Homeowner Flood Insurance Affordability Act, which amends the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA). The Senate passed language that is identical to HR 3370 by a vote of 72 to 22 on March 13, 2014 and the President signed it into law on March 21st.

Of immediate interest to our members is the fact that HR 3370 amends BWA’s escrow provision, extending the effective date from July 6, 2014 to January 1, 2016 and making other clarifications about the loans that Congress intended to be subject to BWA’s mandatory escrow requirement.

For an initial analysis of HR 3370 and its likely impact on NFIP compliance please go to ABA Staff Analysis.